Investing in high-dividend stocks is known to be one of the safest investment techniques for the long-term investors. During market collapses, dividends provide a soft cushion against capital losses. If things work well with the dividend stocks, they can provide growing-dividends. The dividend-growth philosophy requires investing in companies with sound businesses with growth potential.
Interestingly, cigarette companies are among the top dividend payers in the consumer services industry. Many prominent investors garner safe and high returns from the tobacco business. Given the extremely low interest environment, investors have been pretty bullish on these stocks. The year-to-date performances of these companies were highly superior. Lorillard (LO) returned 37%, followed by British American Tobacco (BTI) (23%), and Reynolds American (RAI) (22%).
Here, is a fundamental analysis of 6 tobacco companies that are well-known in this business. I have analyzed these stocks from a fundamental perspective, adding O-Metrix scores and FED+ (Future Earnings Discounted + Equity) valuations where possible:
(Data obtained from finviz/morningstar and is current as of November 2. You can download the O-Metrix calculator, here.)
Lorillard is a very interesting company. After the court ruled in favor of flavored cigarettes, the stock went berserk, moving up all the way to $110 from $80 level. In the following weeks, the stock retreated below $100, before bouncing back to the $110 level. Since that it has been trading around $110.
As of November 2, the stock was trading at a P/E ratio of 14.55, and a forward P/E ratio of 12.66. Lorillard is a nifty dividend payer with a yield of 4.5%. Analysts estimate an EPS growth of 12% for the next 5 years, which sounds pretty bullish. However, given the past 5 year annualized EPS growth of 10.80%, the target growth rate seems attainable. O-Metrix score of 6.06 is above the market average. My FED+ fair value range is $116 - $125. While the stock trades below that level, it is worth to state the negative book value of -$8.69 on the balance sheet.
Founded in 1902, the U.K.-headquartered British American Tobacco is one of the oldest cigarette makers around the world. The company is best known for its Dunhill, Kent, Lucky Strike and Viceroy Brands.
As of November 2, the stock was trading at a P/E ratio of 17.48, and a forward P/E ratio of 13.62. The company offers a yield of 4.20%. Book value per share is $14.17, and analysts estimate an EPS growth of 10% for the next 5 years. Based on these estimates, my fair value range is $86 - $100. At a price of $91, the stock is fairly-valued.
North Carolina-based Reynolds American was founded in 1875 in Winston-Salem. Its best known brands include Winston, Salem, Camel, and Pall Mall. Reynolds American also manages several licensed brands, including Dunhill and State Express 555.
As of November 2, the stock was trading at a relatively high P/E ratio of 16.64, while the forward P/E ratio is 13.5. Reynolds American has a nifty dividend yield of 5.59%. Analysts estimate 8% growth for the next 5 years. Based on this estimate, RAI has an O-Metrix score of 4.51. Fair value range for Reynolds American is $34 - $45. Analysts’ mean target price of $39.5 fits perfectly at the middle of this range.
Established in 1919, Virginia-based Altria Group (MO) is one of the oldest companies in the U.S. The company is best known for its Marlboro, Virginia Slims, and Parliament brands. Altria is also diversified into different business, maintaining a portfolio of leveraged and direct finance leases in transportation, as well as power generation and manufacturing equipment.
As of November 2, the stock was trading at a P/E ratio of 16.23, and a forward P/E ratio of 12.37. The year to date return is 15.12%. The company is a nifty dividend payer with a yield of 6.05%. Analysts estimate an annualized EPS growth of 7.70% for the next 5 years. Based on these values, my FED+ fair value range for Altria is $26-$28. At a price of $27, the stock is fairly-valued. Its O-Metrix score of 4.81 is in line with the market average
Philip Morris (PM) is an international player in the cigarette business. While Altria does business primarily in the U.S.A, Philip Morris operates primarily in the European Union, Eastern Europe, Middle East, Africa, Asia, Canada and Latin America. Thanks to its gigantic market size, the company successfully competes with local companies throughout the globe.
As of November 2, the stock was trading at a P/E ratio of 14.54, and a forward P/E ratio of 13.27. Its yield of 4.40% is not the best in the business, but its EPS growth estimate of 10.50% is superior to most peer companies. My FED+ fair value range for Philip Morris is $73-$74, which is slightly above the current price. PM also returned 21% since January, but it still has some potential left to be fairly-valued. Stifel Nicolaus has a buy rating with a target price of $75.
Vector Group Ltd (VGR) is an interesting stock to watch. Besides its tobacco business, the company engages in residential brokerage and real estate operations. The stock is highly volatile, sometimes going up and down unexpectedly on pretty high volume.
VGR returned 7% since January. While Vector’s 9.3% dividend yield is the best in the industry, it is unlikely that the company can keep paying dividends at this rate. The balance sheet shows a negative equity of -$0.62 per share. The P/E ratio of 18.76 is also the highest among the group. Analysts estimate annualized EPS growth of 11% for the next 5 years, which sounds too good to be true given the 0% growth in the last 5 years. Even if we use this estimate, the FED+ fair value range for Vector Group is $13 - $14, which is significantly lower than the November 2 price of $17.26.
Tobacco stocks make pretty good profits and share them with the shareholders by offering nifty dividends. Based on FED+ Valuation model we can state the following:
- Lorillard and Phillip Morris are undervalued.
- British American Tobacco, Altria, and Reynolds American are fairly-valued.
- Vector Group is over-valued. Its yield may not be sustainable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.